Policy-makers, regulators and the banking industry have been discussing ways to strengthen the financial system ever since Lehman Brothers collapsed five years ago. As a major player in this debate, the European Commission (EC) published proposals in July designed to make banks stronger across the EU. Covering areas such as governance, remuneration and transparency, the Capital Requirements Directive (CRD IV) also provides detailed guidance on the amount of capital firms need to hold as a percentage of total assets.
It was against this backdrop that Société Générale issued a $1.25bn additional Tier 1 bond transaction to comply with CRD IV. Carrying an initial coupon of 8.25%, the issue is perpetual but callable every five years, at which point the coupon can be reset in line with prevailing interest rates.
Crucially too, the deal carries an innovative write-down/write-up mechanism so that investors in the bonds share the pain if Société Générale’s capital structure becomes uncomfortably weak.
Write up, write down
“If our common equity Tier 1 capital ratio falls below 5.125%, the transaction is absorbed to keep our ratio at a minimum of 5.125%,” says Stéphane Landon, head of asset and liability management and treasury at Société Générale. “But our deal also has a write-up component, so we can decide to reinstate the bond up to the initial amount – and pay a coupon – if our circumstances change. Reinstatement is at our discretion but this mechanism allows fixed-income investors to participate in the deal as it has no equity features,” he adds.
Société Générale’s common equity Tier 1 capital ratio stood at 9.5% in early August, its target for 2013 and well above minimum regulatory capital standards. However, the new issue reinforces the group’s overall financial muscle, boosting its total capital ratio by 27 basis points.
“We have used a discretionary write-up mechanism before but it had to be adapted to comply with the new regulations, so there were lengthy discussions with our structuring team and the regulators to make sure the final product was fully CRD IV compliant,” says Mr Landon.
Holiday issue
The bank started working seriously on the transaction at the end of July, after the EC published its proposals. Société Générale was the global coordinator and structurer. Citi, Credit Suisse, Deutsche Bank and HSBC were appointed as co-lead managers. Generally, August is exceptionally quiet for the Euromarkets but Société Générale decided to press ahead with preparations for its deal during this traditional holiday month.
“We announced on August 19 that we were going to do the deal and we then held a roadshow on August 26 and 27. Overall we saw or spoke to about 150 investors over those two days – two teams were in Europe and one in Asia, so we held meetings in the UK, Switzerland, Hong Kong and Singapore. There were lots of technical questions and credit must to go to our banks for preparing presentations and question-and-answer sessions so meticulously. As a result, reaction from the market was very positive despite macro uncertainties such as the Syrian situation,” says Mr Landon.
Société Générale also obtained credit ratings for the issue from all three major credit rating agencies, securing Ba3 from Moody’s, BB+ from Standard & Poor’s and BB from Fitch. These gave further comfort to investors and on August 29, the $1.25bn transaction was launched.
“The deal was a challenge on several fronts. It was 10 days from the moment we announced the roadshow and gave early indications of pricing to the time we actually launched. That meant we were at the mercy of market movements over quite a long period. There was also a fair bit of work to do in terms of educating investors about the transaction. And it was tricky to price the deal because there were no similar transactions. So we compared it to the performance of previous Tier 1 deals that we had done and priced it in line with them,” says Mr Landon.
Paving the way
The strategy proved highly successful. Books opened with the market on August 29 and investors were given initial guidance that the coupon would be about 8.5%.
By midday, orders of almost $4bn had been received so guidance was set at 8.25% to 8.375% for the coupon and $1bn to $1.25bn for the amount. Just 45 minutes later, books were closed with interest in the deal sufficiently strong as to set the coupon at the lower end of guidance and the quantum at the upper end.
“The final orderbook was more than $4.4bn and was of an extremely high quality. About 90% of the deal went to asset managers, banks, private wealth managers, pension funds and insurers, with the remaining 10% going to hedge funds,” says Mr Landon.
“We were extremely pleased with the transaction. We have had lots of enquiries about the structure so we believe it has paved the way for other issuers in this space,” he adds.
